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MOSL: HAVELLS INDIA (Neutral)-Lloyd facing stiff competition-Strategy in place but proving time consuming

HAVELLS INDIA: Lloyd facing stiff competition; Strategy in place but proving time consuming

(HAVL IN, Mkt Cap USD6.1b, CMP INR666, TP INR700, 5% Upside, Neutral)

 

• Another quarter of revenue pressure: Revenues continued disappointing for the second consecutive quarter, with growth of meager 4.5% YoY to INR27.1b (10% miss). EBITDA too declined 11.7% YoY to INR2.8b (24% miss), with the margin contracting 180bp YoY to 10.2%. Other income came in higher than our estimate at INR397m. However, the tax rate stood at 34% v/s 30.8% in 1QFY19. Thus, net profit was down 17% YoY to INR1.7b (29% miss) in the quarter.
• Lloyd hit by intensifying competition: In a seasonally strong quarter backed by a robust summer season, Lloyd reported an 8% decline in revenues. While Lloyd revenue was impacted by a sharp decline in LED TV sales, we believe that even in the AC business, the company has lost market share. Lloyd reported an EBITDA margin of just 1.4% v/s 8.1% in 1QFY19 due to (a) weak top line and (b) higher ad spends at 10.2% of sales v/s 7.1% in 1QFY19 (likely against the backdrop of the Cricket World Cup). Management admitted to fierce competition in terms of pricing in the segment as competitors were more focused on volume rather than profitability, especially given weak sales last summer and the high inventory level into the summer season this year. Thus, despite of input cost pressure on account of INR depreciation and higher import duty, price hikes eluded the segment. Lloyd's performance was also impacted by the ongoing distribution network revamp, as management is focusing on increasing penetration through multi-brand retail rather than the traditional low-price model distribution network. We note that Lloyd is carrying higher-than-usual inventory at the end of the season.
• Real estate slowdown impacts core growth: Ex-Lloyd business, HAVL reported revenue growth of 9% YoY. Management attributed flat growth in the Switchgears business to the slowdown in the real estate market. The industry has been registering negative growth since Nov'18; however, HAVL has gained market share in the segment. Going forward, the recovery may be stretched out in the segment. Cables & Wires segment reported revenue growth of 4%, but is expected to recover in the second half on account of likely higher infrastructure spending. Lighting business continues witnessing price erosion. However, the key silver lining was the ability of the company to improve margins (+140bp) on account of a better product mix. ECD segment delivered strong growth of 24% YoY, led by high-teen growth in fans segment, market share gain in water heaters and strong growth in other appliances, given the low base. The company continues gaining market share in the ECD segment and expects the trend to continue. On the margin front, HAVL (ex-Lloyd) EBITDA margin stood at 12.9% (-60bp YoY) - the weakest in the past two years.
• Margins to expand going forward: EBITDA margins were impacted by high employee costs and higher ad-spends. Together these two factors led to an 180bp contraction in the blended EBITDA margin. Ad-spends were higher on account of the IPL/the Cricket World Cup and may taper down going forward, supporting the margins recovery. Also, it has been investing to build capabilities with new hires and believes that such investments have peaked. Thus, margins should recover in the core business from the current level of 12.9% (as reported in 1QFY20). In the Lloyd business, the new factory will cater to ~70% of the AC business in the next season. Ad-spends in the Lloyd business stood at 10.2% of sales in 1Q v/s ~7% in FY19. It expects ad-spends to moderate to ~5.5% in FY21, aiding margin expansion in Lloyd.
• Cutting EPS estimates for FY20/21: We cut our FY20/21 EPS estimates by 11%/13% to factor in lower revenue growth and margin assumption, especially in Lloyd. Our FY19-21 EPS CAGR estimate now stands at 17.6% on the back of revenue CAGR of 15.4%.
• Lowering TP; maintaining Neutral stance: On back of our EPS cut, our TP is reduced to INR700 (prior: INR800) with an unchanged target FY21E P/E multiple of 40x (in line with the last-five-year average trading multiple but at ~10% discount to the current one-year forward multiple of 44x). Maintain Neutral as we await a better entry point in the stock.